ERISA-Third Circuit Rules That Withdrawal Liability, To The Extent Attributable To The Period Of Time After a Bankruptcy Petition Has Been Filed, Is An Administrative Expense and Entitled To Priority Under The Bankruptcy Code

In In Re Marcals Paper Mills, Inc., No. 09-4574 (3rd Cir. 2011), the Third Circuit Court of Appeals (the “Court”) faced the issue of whether, under ERISA, an employer’s withdrawal liability under a multiemployer pension plan, to the extent it is attributable to the period of time after the employer has filed a petition in bankruptcy, constitutes an administrative expense that is entitled to priority under the Bankruptcy Code (as opposed to being a general unsecured claim).

In this case the bankruptcy petitioner, Marcal Paper Mills, Inc. and its successor (“Marcal”), had manufactured paper products, and had operated a fleet of trucks driven by union members. Pursuant to a series of collective bargaining agreements with the union, Marcal had been making contributions to the Trucking Employees of North Jersey Welfare/Pension Fund (the “Fund”). The Fund is a multiemployer defined benefit pension plan. On November 30, 2006, Marcal filed a Chapter 11 bankruptcy petition. However, it continued to make contributions to the Fund, until May 30, 2008. At that time, Marcal’s assets were sold and it ceased to have union employees. This cessation resulted in a complete withdrawal from the Fund under ERISA and a corresponding withdrawal liability. The Fund then filed a claim in Marcal’s bankruptcy proceeding, asking that a portion of the withdrawal liability, which is attributable to the period of time after Marcal had filed its bankruptcy petition, be classified as an administrative expense and therefore be given priority in payment against other claims against Marcal.

In analyzing this case, the Court noted that, under Title 11 U.S.C. § 507(a)(2) of the Bankruptcy Code, administrative expenses allowed under § 503(b) are entitled to priority over the claims of general unsecured creditors. The Court said that, in order to be classified as an administrative expense under that section, the expense must arise from a post-petition transaction with the debtor-in-possession, and the expense must be beneficial to the debtor-in-possession in the operation of its business. Withdrawal liability is imposed on an employer in order to keep a multiemployer pension plan, such as the Fund, funded and able to pay retirement benefits to the union employees, even after the employer withdraws from the plan and would not otherwise be required to make further contributions. Those union employees were required to perform work post-petition in order to keep Marcal in operation, unquestionably conferring a benefit to Marcal’s bankruptcy estate. Pursuant to the collective bargaining agreements and the terms of the Fund, Marcal promised to provide pension benefits in exchange for that post-petition work. As such, the Court concluded that the requirements of 11 U.S.C. §§ 503(b) & 507(a)(2) of the Bankruptcy Code are satisfied. It held that the portion of the withdrawal liability attributable to the post-bankruptcy petition period is an administrative expense and therefore entitled to priority in payment over general unsecured claims against Marcal. The remainder of the withdrawal liability is treated as a general unsecured claim.